Scorpio Tankers Inc (STNG) 2013 Q4 法說會逐字稿

Hello and welcome to the Scorpio Tankers fourth-quarter 2013 conference call. Today's conference is being recorded. I would now like to turn the conference over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

Thank you and thanks everyone for joining us today. On the call with me are Robert Bugbee, President; and Cameron Mackey, Chief Operating Officer.

The information discussed is this call is based on information as of today, February 24, 2014, and may contain forward-looking statements and involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in our earnings release that we issued today, as well as the Scorpio Tankers' SEC filings, which are available at ScorpioTankers.com.

Call participants are advised that the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. Slides for this call can be found in the Investor Relations section on our website under Corporate Presentations. I now turn the call over to Robert Bugbee.

Good morning, ladies and gentlemen. First, I'd like to apologize that our Chairman Emanuele Lauro won't be on the call today. He's got caught up in some travel issues at the airport.

Anyway, I'm just going to briefly just go through a couple of things on the fourth quarter. The fourth quarter in terms of net income was -- some three things have negatively contributed to this -- G&A, OpEx, and revenue.

Firstly, G&A was probably -- was a little bit heavy on a forward run rate. We had some transaction costs in there related to deals that we were doing. We had an increase in non-cash restricted stock and we also had a $2.2 million, $2.3 million bonus that hadn't been accrued for earlier in the year. In terms of OpEx, I think that it is higher than the normal rate, firstly due to a seasonal factors related around billing.

Secondly, some prepayments that we took advantage of, and also, some expenses that aren't related necessarily to the fleet in the water but their pre-expenses related to the number of deliveries that we have going forward this year and we were booking them against our normal OpEx. Then finally revenue -- revenue was adversely affected not just because the fourth quarter itself was weaker due to refinery, turnaround, delays in refineries, but also because we did a little bit of repositioning in terms of shifting the Handy and the LR1 fleet more towards the dirty product trades, which we anticipated to be stronger, and taking them away from the clean trades.

The actual fourth quarter itself, in terms of the markets, was weaker than frankly we expected. We were pleasantly surprised about how strong the third quarter was. Now we're analyzing this and we that think this could actually become a factor going forward as we have so much expected improvement and strength from US Gulf exports, particularly in second quarter, third quarter, and is resuming now as the severe cold weather goes away.

We could see those refinery turnarounds go deeper into the end of that third quarter, early fourth quarter, and this could remain a factor going forward. However, we view that -- as a Management -- we view that we're expected to make a return on your total capital, so we were very pleased in the fourth quarter in two areas. One was we're very pleased with the progress of our Dorian shareholding, and we're very pleased in our VLCC investment, in which we took $90 million of your money to put down payments on seven VLCCs, and on a mark-to-market basis, that would be an approximate $50 million gain now, within three months.

So in terms of your overall position in the fourth quarter, yes, we were down the net income part; we can explain that. But in overall concept, we made money, we increased value, which is also in relation to our confidence of the forward market going forward. We were happy to increase the dividend in that quarter.

In Q1, we've seen, as we've stated, an improvement across all our sectors, particularly in the Handies and the LR1s trading in dirty, that decision has really played off. We would -- if we're looking at various reports -- we would think that the market fully -- and analysts -- haven't fully appreciated still the strength or the importance of the palm oil trades and the vegetable oil trades related to particularly these new building ecodesigns.

At this stage, I'm going to briefly pass the call over to Cameron Mackey, who is going to go over a couple of things -- our delivery schedule and some of the developments that we see this year. So, Cam, if you take that away?

Thank you very much, Robert. Just going through the materials which have been posted on our website -- very simply, you can see the development of our newbuilding fleet as it's expected to hit the water, the majority within 2014. We have done quite a bit of work in anticipation of these deliveries -- notably, we've done a lot of business with shipyards where we're extremely confident that the deliveries will be on schedule or ahead of schedule and we maintain that expectation.

On the second slide you can see some information about the view or the analysis of various bunker or fuel prices for ships. With regulations coming into place in the next 12 months, we anticipate our advantage by being a spot player and having the most fuel-efficient assets to now increase because of this spread and the requirement to use more expensive fuel, more of the time.

Then on the last slide, you'll see some information on various trade groups and developments of the spot market. It's important to note that since the fourth quarter where we've had or experienced some delays or hiccups in various refining volumes, now we see those volumes starting to increase and naturally a trend both towards solving various demand spikes that come up by virtue of the winter months and the extremely cold temperatures or expanding in the emerging markets consistent with what we've seen in previous quarters.

I'd like to add a couple of things to this graph. We think this graph is a key graph to understanding, particularly, the MR market and it is the key source that we look to, to monitor our developments in the market. If we look at the right hand side of this graph, we can see this effect of what was happening in the first quarter, with the cold weather resulting in a drawdown of US Gulf fixtures, the decline of fixtures, and the corresponding rate.

Then immediately, as the market starts to look through into what eventually is going to become spring, whether it's in February or March, we start seeing that cargo volume start to increase, particularly the cargo volume to South America. South America is really important because of the huge distance it requires in terms of ton mile demand.

We've seen a very, very quick response to this. The market drove up from last week, continued to drive up through the week despite it being a very unusual week that it was IP Week in London, which normally means most of the players are socializing as opposed to working, but we can see that effect of what happens when South America and US Gulf starts to export.

And we can see what happened last year; it's very similar. The first period was weaker and then we're expecting this to ramp up. At the same time, in the last 10 days or so, we've seen Asian markets start to improve across-the-board in all sizes -- the LR2s, the LR1s as well as the MRs -- and we feel very confident, in the long term, that things remain intact, that there is more demand coming than there is supply. With that, just like to turn it over now to questions and answers.

(Operator Instructions)

We will now go to Jon Chappell with Evercore.

Thank you.

Robert, want to follow up on some of the comments you made at the end of the presentation there. As it relates to the first quarter, you talked about the LR1s, some of the Handies trading in the dirty segment and the impact that the repositioning had there.

How is the rest of the fleet positioned given what you mentioned with the Eastern Hemisphere starting to improve and then also this shift from TC2 strength to TC14 strength?

The LR2s are predominantly positioned in one way or another for the East, for those new refineries that are coming up in the Middle East and expansion from India. So they are in the East trade.

And we've been feeling daily improvement in that now over the last 2 to 3 weeks. The MRs, particularly with the quality of fleet that we have, the MRs haven't really been exclusively trading in products anyway in the first quarter.

You've seen ourselves make various announcements that we've had vessels in palm oils; we've had vessels in vegetable oils, too. Right now, they are positioned as much as we can for what we think the improvement will be in the US Gulf.

So we're not trading them so much into Europe; we are not trading them so much in the East. We're really trying to hammer down on what we see home turf and where the actual play is going to be. There is significant movement there.

If you look at a conventional MR, just two weeks ago, US Gulf Currents was probably paying about $450, has been paying $600, $650 for one of the topline ships. You've even managed to cross $700.

That's equating to a pretty strong $17,000, $18,000 number. All of last week's fixtures with our eco-ships coming up in the low $20,000s or mid $20,000s, as a result of not just their fuel efficiency, but their ability to actually carry cargos and do voyages that are preferential to the customer.

So there's been a pretty big swing just in two weeks. We're going to play in that market; we're confident to that long-term trend that we believe is intact.

We're confident that we're going to have the same dynamic as we had last year, that you have increasing US Gulf exports. And as we expected, once this cold weather has come away from its severe position, you've automatically seen the relief and the ability for the US Gulf to start to re-export again.

Right and just one--

Obviously the Handies and the LR1s that are being positioned almost exclusively, almost exclusively -- so 90% to 95% on the two pools of Handies and LR1s have been and remain in the fuel oil or dirty trades. And that is a huge step-jump in terms of earnings from 4Q to 1Q, and is also a big step-jump from whether or not you've been trading in clean or you've trading in dirty.

We don't really want to give, at this stage, exact guidance. But you've virtually got a doubling in -- at least a doubling in TC rates between Handies and Panamaxes 1Q to 4Q.

We would not expect that to continue through the quarter because as we've said, it's getting warmer. So we would expect to see the Handies come off, the LR1s come off, and those MRs really drive forward now into the rest of the year, with the [beacons] coming in 4Q.

Just really quickly, without giving us any numbers, Emanuele said in the press release you're going to be profitable in the first quarter. Just looking for how much of the first quarter you've already booked to try to gain confidence in what's in the bag when you talk about profitability for 1Q.

At this stage, in terms of pretty visible accounting -- so you have a 90% certainty over your accounting -- you would have booked -- you have that through to today's date itself. So that's whatever it is, 60%, 63% of the quarter.

We obviously have voyages that we're fixing, as I indicated last week, that are in that balancing 30%, 35%. So you probably have a 87% certainty over about 70%, 75% of the quarter right now.

Got it. All right. Just two for Brian.

On the G&A, Robert hashed out some of the issues in the fourth quarter. What's the clean run rate we should look at, including the non-cash restricted stock amortization starting first quarter?

$9.5 million to $10 million.

And then the second one, obviously a huge CapEx budget. You raised a lot of equity last year, sealed some financing.

What's your comfort level in the financing ability for the remainder of the 45 ships this year? And what's the pro-forma balance sheet going to look like once you've raised the financing and taken delivery of the ships?

We have raised for all of the product carriers we have raised financing for. We have not done it yet on the VLCCs, but we're going to look forward to deciding what we are going to do on that and move forward again in 2014, if we keep those the way they are. ¶ When we're in full delivery of everything, we've talked about moderate leverage. So we've got to cap it around 50%.

Perfect. Thanks Brian. Thanks, Robert.

We will now go to Gregory Lewis with Credit Suisse.

Thanks and good morning, guys.

Robert, just touching on Jonathan's question about the repositionings.

Is that something that as we stand today, the fleet, you're comfortable in the mix and we shouldn't really expect that to impact Q1? Or do we think that spilled into Q1 as well, as it started maybe a little bit in late Q4?

You're going to have a positive in Q1 because, as I was trying to say, we'd already basically positioned or set the Handy and the Panamax fleet for those dirty trades by the time we entered Q1. So the cost there was to your revenue to Q4.

Your positioning is clean now to Q1. And as we're going forward and you have these deliveries of these ships coming forward, you will see, let's say, the increase of the exposure in terms of those newer vessels. And we will leave the other vessels where they are.

Okay, great. And then just following up on the fleet, when I think about some of the asset sales that you did in the first quarter, clearly, at least one of those was a Chinese-built vessel.

Could you walk us through the dynamics of whether it's fuel efficiency or operating costs which made that vessel less attractive in the sale and purchase market? Clearly there was a discount.

Sure, I've got it, we've got it.

First of all, we've made a clear statement for some time now that we actually really believe these environmental regulations are going to matter in 2015. So we made a clear statement that we will be getting out of our conventional old tonnage as we go through this year. And you've seen us already make announcements for the sale of two of the LR1s and now the sale of the STI Spirit, this Chinese LR2.

I can quite confidently say that we really, really should not have come out of our original thesis in terms of the management of buying Chinese tankers. And it starts and really ends there.

That ship was built in China. It doesn't matter that New Times is a top yard. They just were not really capable of building decent product tankers.

We've expected others on charter, and therefore you are going to face a steep discount to a normal Korean or top-quality Korean or top Japanese vessel. That's it.

In many ways, on the commercial side, we were very happy with the price we got. It could have been a loss and that's it. You have to take the lick and goodnight. We're glad it's over. Getting rid of it, ironically, is actually accretive to earnings.

Yes, I was looking at that.

Just to quantify, and I know that every vessel is different and every price matters, but would you think a 10% to 15% discount is a fair way to think about Chinese vessels -- and not even Chinese vessels today, but maybe from that vintage, from five or six years ago?

It could be 10% to 30% because at least the ocean Spirit works. The way you should look at it is we have two vessels -- the Noemi and the Senatore -- that are Japanese built. And even though these vessels are smaller, they are almost certainly going to fetch, when we sell them, a higher price than what the STI Spirit will sell for.

Okay, guys, perfect. Thank you for the time.

We will now go to Frode Morkedal with RS Platou.

Hi guys, just one quick question.

I know you like the eco-ships and I know you don't want to buy non-eco-ships. But there's a lot of competitors who also have eco-ships. Are there any ones you find attractive enough to buy?

That's a good question.

We'll start with no, we're definitely not going to buy any non-eco-ships. We also have stated time and time again that we are not there to pay over $40 million for an MR; and we are not really there to take delivery of product tankers after June 30, 2015.

There are competitors that have been funded -- that have deliveries of vessels after this date -- whatever they are -- whether they are LR2s or they are MRs.

And so the answer really is, no. It's not a question of whether their fleets are quality. That's just not in our business scope. We are going to be distributing capital back to shareholders either through buybacks or through dividends as soon as we can.

We're trying to indicate that in raising the dividends constantly. It doesn't too much of work on analysts to realize that we will are going to be throwing off significant EBITDA once these new vessels deliver; that Cameron has pointed out that that delivery is on schedule; and that we are agnostic with regard to our other non-core investments outside of the product market.

But we're a big Company; we've made our play. It was very important for us to be one of the first movers to purchase ships in the lower end so we that have the lowest breakeven, the highest ability to redistribute cash back to shareholders.

Acquiring a competitor with later deliveries, at a higher price than we're comfortable with, is not in our business plans.

Okay, great. Thanks.

We will now go to Omar Nokta with Global Hunter Securities.

Thank you, good morning.

Just wanted to ask, just about the Handies again. Are there any restrictions you faced in repositioning those or reconstituting them into the dirty trade due to them being a part of your charter in-fleet? As in, are the owners of those vessels fine with them going from clean into dirty]?

Not so much because primarily that's accepted largely as a dirty trade. Going forward, we've stated that we feel those dirty trades, whether it's crude oil or whatever have bottomed.

We think a real hidden investment that we have is in all the Handy-size new eco-ships that we have delivering now, coming forward, all going to be in position for next winter. Because this is a market that it's impossible to trade those ships effectively without touching those environmental-sensitive areas like Canada and Europe, and especially with the [ice]-class features in addition. So that's how we would view that.

Got it, all right.

Then, Robert, just on the VLCCs, I think last quarter you had mentioned that to really be in that business you have to have scale. How do you see the VLCC shaking out here? You've got seven on order. Can you just give us an update on your thinking with those ships?

The first thinking is the actual play itself is going forward well. It's going forward better than we would have expected.

We had always said that asset values we thought for new buildings would cross $100 million by the end of January, which they have. But more importantly, you are starting to continue to see a better general fundamental in supply and demand, which as you've seen, has resulted in more favorable spot rate pricing.

We think that there are companies out there that are forming quietly, have the capability of moving for size. Rather like we said on the LPGs, we're genuinely agnostic to this trade. It is all about creating the best value proposition to our shareholders.

Okay and just -- that's a good answer, thank you. And then just--

Of course, I would -- just without going into too much detail, Brian indicated that we have not yet or have not gone to put finance on these vessels either. That's a good clue.

Yes, it is, thank you.

Just transitioning that to the thinking on Dorian, that 26% stake that's worth over $230 million. Is it still the intention for Dorian to lift here in the US at some point within the next--?

If everybody doesn't mind, at this particular date, we, for various reasons, do not want to comment on Dorian at all.

Okay, fair enough.

Zero.

Thanks, Robert. That's it for me.

Thanks.

We will now go to Matthias Detjen with Morgan Stanley

Hello, guys. Thank you for the update. And most of my questions have been asked, but I wanted to follow-up on the VLCC fleet. ¶

You're saying you are pretty agnostic to it. And I was wondering, are you looking to grow the fleet? Or do you think that that was a one-off opportunity which you took? Or do you think that there might be possibilities of expanding that exposure?

There are only two ways you can really grow the VLCC fleet. You could either acquire vessels that are in the water, all of those on non-eco, so we aren't going to do that.

The second would be to put in new orders, which are way down the road. Our orders are pre dominantly in 2015. And the orders that you'd have to put in now are in 2017; and they are 8%, 9%, 10% higher in cost than the orders that we have put in.

So I don't see that we will --98.9% chance that we will not be increasing that fleet.

Okay, great. That was it for me, thank you.

Thank you.

(Operator Instructions)

We will now go to Eirik Haavaldsen with Pareto Securities.

Yes, hi.

On your LR2s, when you look at your performance on those, can you give any clarifications as to the eco savings on those, when you take delivery of the new builds?

Hi, Eirik.

I think where we've guided in the past is somewhere in excess of 10 tons a day. We think it will experience at least that. But it would be a little bit premature for us to give hard guidance simply because we need to get these ship on the water and run them in.

But we're extremely confident, but we just -- as same way as we did on our MRs, we don't want to put numbers out there unless we're 100% confident. So we'll let them come.

There are a couple things I would add to that. The LR2s that we have are pretty special in that they're being built at Hyundai and Daewoo, and these are phenomenal yards.

The second aspect is that they've [gained], just the same as the vessels that we are having delivered this year will actually have a higher spread in fuel savings than that that we've already said to the market.

We've already said on our existing MRs in the water that we're confident with the $3,500 a day spread on the fuel efficiency in the MRs. That's just going to widen as the 2014s start getting delivered, and the 2015s get delivered, and you then add the low-sulfur fuel coming in 2015.

When it comes to the LR2s, as Cameron is indicating, you've really got the best of the best yards there are anywhere dealing with a fairly simple ship like an LR2 when they are used to pretty sophisticated drilling stuff, et cetera.

As Cameron says, we don't want to put much more of a number out there; but we're really excited to get them.

I assume you'll have similar OpEx savings, as well.

But given the success you had trading your other ones dirty, do you also anticipate doing switching back and forth for the LR2s? There are some interesting -- I mean, the Aframax order of today is nothing, right? So there could be interesting opportunities there as well.

Yes, maybe, but we come from a position where we believe that the product story is very much intact. I know that some people look, and they go -- Oh, wow, we could get as much as 5% year-on-year supply growth in products.

But our historical context as the Management is coming from 2002, 2003, 2004, 2005, 2006, 2007, where you pounded away at fleet growths of around about 10%, with some years even being higher than that. And yet the market virtually just increased every single year.

That's because what we are seeing is we are seeing this big shift in the distribution of products across the world and the opening of these refineries in the Middle East, et cetera, and the expansion of trade from the places like the US Gulf.

So we're fundamentally building the ships for the clean petroleum market. Obviously, they have the added benefit that -- it's like a free option. If the Aframax market is going like crazy and crude oil market is huge, well you can always take an LR2 and put it into that market. It's a free go, but we would not anticipate that on our models at the moment.

Right. Thank you, Robert.

It appears that we have no further questions at this time. I will now turn the conference back over to the speakers for any additional or closing remarks.

Great, thank you.

I would just say one added thing here, if it hasn't come through tonally in the calls, is that Management is really focused at this stage in staying and executing, taking delivery of these vessels, and most importantly, getting to a point where we have significant EBITDA and we can really focus on that distribution of earnings to shareholders as opposed to just building a Company just for fun. ¶

We're away from the actual adding ships for growth for growth sake, and now we're into let's run the Company and let's do the best for shareholders in terms of creating value from the various different degrees of freedom and levers that we can pull.

Thank you very much, everybody.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.